First off, lets speak about the notional difference between contractors and freelancers.
Although the following isn’t a hard and fast rule, its a fairly good measure of what separates the two professions.
- In general, contracts need to incorporate limited companies (unless they opt for tax inefficient umbrellas), because clients wont accept them as sole traders due to them being liable for the workers NIC payments
- Contract lengths vary from 3 months to 1 year on average
- The get paid weekly or more likely monthly throughout the life of the project.
- Usually operate as sole traders
- Pick up work from industry contacts or dedicated marketplace sites such as odesk or people per hour
- task durations can start from a few hours
1. Working as a sole trader
As there is no company in this case, there is no concept of a company car, so for tax purposes, the car belongs to you.
Sole traders can opt to use one of two methods to claim tax relief for the use of personal on business journeys.
- If the haven’t claimed any capital allowances on the car they can use the mileage calculation whereby they total the business mileage covered between the tax year 6th April the previous year to 5th April in the current year. They then apply HMRC mileage rates of 45p per mile for the first 10,000 miles and 25p thereafter. This blanket amount is intended to cover the cost of running and maintaining the car for the business journeys taken.
- If the sole trader doesn’t feel that the mileage method above covers the business cost of running their car, they they can opt to use the actual method. This involves summing all running costs, fuel, MOT, tyres, repairs, maintenance etc and then taking the percentage of this that related to their use of the car for business purposes.Using this method also means that a proportion of capital allowances on the vehicle may also be claimed.
2. Working through your own limited company
If you own the car
This is the most popular way of working for contractors and again you can claim 45p for the first 10,000 miles and 25p thereafter.
Recording your mileage in the AccountsNet portal automatically keeps a running total of business miles covered and correctly applies the above rates, it also generates reimbursements which you can simply transfer from the company account direct to your personal bank.
If the company owns the car
Having a company car is seen as a large tax benefit, because otherwise the employee would need to take money from the company, pay the tax on it and buy the car themselves.
If the company provides you with a car it will belong to the company and the costs associated with the purchase and running of the car will be tax deductible against the company’s profits.
However in most cases the tax saving to the company is outweighed by the annual taxable benefit to you.
The car benefit charge is based on a percentage of the list price of the car graduated according to the level of the car’s carbon dioxide emissions.
The percentages range from 5% for a petrol car with CO2 emissions of 75g/km or less to 35%.
An illustrative example
For example for a car costing £15,000 the car benefit of a petrol car with CO2 emissions of 155g is 24% = £3,600.
If the company also pays for all the fuel for the car there is an additional car fuel scale charge which is £21,100.
The same percentage is used to arrive at the taxable benefit so in the example the taxable benefit would be 24% x £21,100 = £5,064 which would give a total taxable benefit of £8,664.
This means that you are taxed as if you had additional income of £8,664.
This charge is an annual charge for as long as the company provides you with the car.
The company is also liable for Class 1A NIC on benefits in kind which would be 13.8% x £8,664 = £1,195.63.
Contact us before deciding how to finance your car
As you can see above, it is worthwhile calling us and we will run through a tax calculation for the car you are thinking of purchasing, to see whether or not it makes sense to buy it through the company, or from personal funds.